In the last two decades, businesses, communities and government have sought to reduce health care costs through a variety of initiatives, many of which are predicated on the principles of managed care. Managed care uses managerial processes such as utilization review, and the restructuring of financial incentives for providers to deliver high quality, cost-effective health care. Since the early 1970s, it has been argued that managed care organizations, such as HMOs, have the potential to create price competition in the health care sector and, by doing so, to improve the efficiency of health care delivery. Researchers have not examined the efficiency of HM0s and the evolution of HMO efficiency. The proposed research examines the determinants of HMO efficiency for the years 1985 through 1994. HMO efficiency will be measured using two different efficiency measurement techniques: data envelopment analysis and stochastic production functions. Comparing these two distinctly different approaches will help develop reliable efficiency measures, which is important because the findings may carry normative implications. Then, HMO efficiency will be related to organizational characteristics, such HMO type, market characteristics, such as competition, and state regulations to develop an understanding of how organizational and environmental characteristics affect efficiency. Finally, the evolution of efficiency among HMOs will be examined. Do HMOs become more efficient over time? If they do become more efficient, what are the causes? How is the evolution of efficiency related to: The failure of less efficient HMOs? Achieving scale economies? Mergers leading to larger, more efficient HMOs? HMO adaptation? Understanding the organizational determinants of HMO efficiency and the evolution of HMO efficiency will provide important information for policy decisions. The primary data are financial reports filed with state regulators and InterStudy and GHAA HMO directories. The data set includes a complete set of HMOs operating in the United States over a nine year period (1985 through 1994). From 1985 to 1993, data is available for 69% of all HMOs. The 1994 data will be obtained and added to the data set at the start of the project. The research will expand significantly the current understanding of HMO performance. While there has been some recent research on HMO performance, there has been little work on HMO efficiency. Previous work on HMO performance provides a solid foundation on which to work while access to already developed datasets and prior research on HMO performance provides the opportunity to do the proposed analysis quickly and at relatively low cost.